Tuesday, April 1, 2014

Online Markets: Selling products vs. selling time

We had an interesting discussion a few days back about online job markets, and why they are not a huge success so far, when other, comparatively less important products are getting huge valuation and visibility. For example, oDesk reached a total transaction volume of a billion dollars, for the 10 years of their existence, and roughly 5% to 10% of the volume becomes revenue for the company. Other labor marketplaces have typically even smaller number of report.

While nobody can ignore a billion dollar of transaction volume, I am puzzled why this number has not skyrocketed. It is very clear that the market serves a purpose: work is a trillion dollar industry. Allowing people to work online allows for better and more efficient access to human capital, alleviates need for immigration, and improves the lives of people involved. It is a no-brainer.

Why does it take so long for online work to takeoff? What is missing?


I was puzzled by these questions for long. I postulated that there are obstacles that prevent employers from hiring online, but recently I got some hints that there are obstacles from the worker side as well. I talked with some friends of mine back in Greece, who are making a very comfortable living working through the platform. I asked how they like making US salaries while living in Greece, and their answer was surprising. They did not see online work as a long term solution, but rather as a temporary gig.

When I asked why, they both indicated the same problem: There is no room in such markets for career evolution. You end up selling your time, and time is not something that scales. It is very hard to grow your business when you are always a freelancer, without the ability to hire new people, delegate tasks, and build a business. Compare now online work with a market like Amazon and eBay. Both Amazon and eBay allow sellers to effectively build businesses. Currently, online job markets allow workers to just sell their time.

When sellers have a capped growth, the market faces headwinds of growth as it tries to reach maturity.

On a general note, this gives birth to a general hypothesis on what can make a marketplace (hugely) successful: The market should allow sellers to grow, without an obvious ceiling. Otherwise, the best sellers are unlikely to be attracted to participate in the platform, due to the lack of upside.

Take some marketplace companies and interpret them through this framework:
  • Google Helpouts: Same restrictions on seller growth as all other job marketplaces.
  • Uber: Obviously, currently the sellers have a cap on growth, which is limited by their time. However, Uber allows the enrollment of limo/taxi agencies, which potentially grow indefinitely.
  • AirBnB: No obvious seller cap for someone who wants to enter the hospitality business.
  • TaskRabbit: Very obvious growth cap for the individual sellers of services.
  • OpenTable: No obvious limit of growth for participating restaurants.
  • eBay/Amazon: No obvious limit of growth for sellers that sell products online
  • Etsy: This is an interesting case. On the surface, the company looks like eBay/Amazon. However, the etsy guidelines dictate that "Everything on Etsy must be Handmade, Vintage, or a Craft Supply." Unfortunately, this places restrictions on seller growth as it implicitly limits sellers to be (very) small businesses. My bet is that either Etsy will revise this policy down the road, once more and more sellers start hitting their growth ceiling.
How accurate is the hypothesis? Time will tell...